Friday, March 25, 2011

Are we in the early to mid stages of a bubble forming in Brazilian real estate? Who can tell - with the global liquidity tsunami gushing in every direction, there has to be other areas other than commodities where dislocations are forming. I found this interesting piece while looking over the news for Brazilian homebuilder Gafisa (GFA). While the "mass" mortgage market is still relatively new in Brazil - hence a whole slew of new potential buyers can now enter the market - some of the anecdotes in this Reuters story are eerily similar to those in the U.S. circa 2005. Who can forget people who were camped out in developments in Las Vegas and Phoenix, just to put a bid down on an empty lot (which of course could be flipped within 2 weeks for a 30% premium). There is also a massive push by the government to expand home ownership - hmmm, it's starting to all sound so familiar.

I was surprised to hear about the cost of offices in Rio's business district - only trailing London, Hong Kong, and Tokyo? More than Manhattan? Must be the beaches. ;)

Listening to Jose Carlos de Vasconcellos talk about Rio de Janeiro's property market is like being transported back to the bubble days in the United States or Europe. The 60-year-old, who came out of retirement to join Brazil's swelling ranks of real estate brokers, is convinced that property in the beachside city (Rio) is a one-way bet despite a near doubling of house prices in just three years.

"I'm confident that the market isn't going to slow down any time soon," he said, taking a break from his afternoon class at a Rio school for real estate brokers. "I don't see any investment that's as good as property."

Burned property investors elsewhere may beg to differ, but Vasconcellos is typical of the blissful optimism that has infused Brazil's real estate market at a time when property in much of the developed world remains buried in sour debts.

Rio, boasting picture-postcard scenery and plans for big investments ahead of the soccer World Cup in 2014 and the Olympic Games two years later, is not alone in a Brazilian housing boom that is inevitably raising fears of an asset bubble in one of the world's hottest emerging markets.

Since early 2008 -- just as the credit crunch was biting in the developed world -- residential property prices in Rio have risen 99 percent with Sao Paulo not far behind on 81 percent, according to a newly launched index by Brazil's Fipe economic research institute. Brazil lacks an official gauge of national house prices, but there have been similar booms in other major cities, including the capital Brasilia and coastal cities in the northeast such as Recife and Salvador.

Americans and Europeans would recognize many of the symptoms of Brazil's property fever. Apartment prices are popular dinner table -- and beach -- conversation in Rio, anecdotes of humble doormen and taxi drivers becoming real estate brokers are common, as are stories of people snapping up apartments without seeing them.

Rio's swankier addresses, such as beachside Leblon or Ipanema, are catching up with the eye-watering prices of Manhattan and central London with three-bedroom apartments changing hands for 2 million reais ($1.2 million) or more.

Rio's central business area has overtaken Manhattan's Midtown district to become the world's fourth most expensive city to rent office space, behind only Hong Kong, London and Tokyo, according to global real estate group Cushman & Wakefield.

Demand for places on training courses to become real estate brokers is booming. Just over 3,300 new brokers were registered in Rio state last year, a nearly ten-fold increase from 2005. (reminds me of the statistic I read a few years back that 1 in 7 people in California had a brokers license)

Brazil's economy grew a sizzling 7.5 percent last year, driven by record-high employment and confident consumers who are swelling the middle class and eager to get a foot on the housing ladder, often with the help of credit. Millions had for long been locked out of owning property because of a lack of financing, but the mortgage market is now growing rapidlyon the back of unprecedented economic stability, bringing home ownership into reach.

With a national housing deficit estimated at more than 7 million units, there is plenty of pent-up demand.

......backed by a $41 billion government low-income housing program.

Mortgage debt in Brazil is indeed relatively low, standing at about 4 percent of GDP compared to about 15 percent in China in 2009, and much higher levels in developed economies.

Brazilian banks have stricter standards too, generally lending no more than 80 percent of a property's value. High mortgage rates also act as a sobering force, although they are now low by Brazil's historical standards. ...... offers 30-year home loans at a 13 percent fixed annual interest rate, almost triple the current rates in the United States.

Mortgage debt may be low, skeptics say, but the overall consumer debt burden has been growing fast when taking into account credit cards and installment payments that carry average annual interest rates of around 30 percent.

The explosion of credit in recent years has raised concern that Brazil is nurturing a new breed of sub-prime consumers who are not financially astute enough to manage their debts and who could default as the economy cools and interest rates rise. "It's like putting someone who has never eaten in front of a banquet. They will get ill from eating too much," said Heitor Mello Peixoto, the head of eyesonfuture, a Sao Paulo business consultancy.

Matos has noticed that more of his apartments are being bought by investors these days, accounting for 40-45 percent of sales, rather than by families who want a permanent home.

Here is where it gets interesting....while mortgage debt is tiny in relative terms to other countries, household debt has surged. This in a society where all forms of credit are relatively new.

Household debt costs stand at around 22 percent of income in Brazil, according to Sao Paulo consultancy LCA Consultores, compared to 15 percent in the United States at the end 2010.

One wonders if there is going to be a post World Cup / Olympics hangover. This certainly happened in China in 2008. Something to keep an eye on the next few years.

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